Most entrepreneurs are familiar with the term “limited liability company” (often abbreviated as LLC) and the benefits that come with incorporating as an LLC. For anyone unfamiliar with the structure, a limited liability company is an entity designed to provide liability protection to small businesses. Liability protection creates a separation between professional and personal assets. If an unforeseen circumstance should impact the business, such as a lawsuit, having incorporated as an LLC would ensure that the owner’s personal assets, like cars and houses, are not affected.
Incorporating as an LLC turns you, the owner of the business, into a member. You’re still the business owner. Now, you also hold membership interest since you incorporated as a limited liability company. An LLC may have just one member, or it may have multiple members. You may choose to incorporate as an LLC, or decide to form under one these three LLC structures.
- Single member LLC
- Member managed LLC
- Manager managed LLC
What’s the difference between these management structures as opposed to a typical LLC? Let’s unpack each entity and what it means to incorporate under one of these LLCs.
Single Member LLC
One of the biggest differences a single member LLC has from a regular LLC is in its name. A single member LLC only has one member whereas standard LLCs may bring on several members (owners) to run the business.
You would think this would make the entity easier to run, almost like it’s the proverbial sole proprietorship of the LLC family tree. However, a single member LLC faces its own unique series of management challenges. The next greatest difference is that an LLC is treated as a partnership at the federal level. A single member LLC, on the other hand, is not considered to be a partnership.
How To Incorporate As a Single Member LLC
What does that mean for entrepreneurs incorporating as single member LLCs? It is up to the single member to have, and maintain, proof that they run the single member LLC’s operations like an LLC and treat the business like a separate entity. Parts of said proof may include drafting operating agreements and taking minutes during meetings. Failure to do this may result in having your liability protection revoked. It may feel a little silly, even unnecessary, since you are the only member but it’s worth taking the time and effort to maintain a single member LLC.
Each of the 50 states in the United States recognizes single member LLC formations, so you can start a business from any state as a single member LLC. The process for forming a single member LLC is also quite similar to an LLC formation. An entrepreneur files their articles of organization with the designated Secretary of State and pays the associated fee. Keep in mind that articles of organization will ask for all of the LLC’s members. It’s perfectly acceptable to list only yourself — after all, you’re filing as a single member LLC.
Member Managed LLC
Seeking a management structure where every member is given equal treatment? You’ve found it with a member managed LLC.
The members of a member managed LLC are all treated as equals. Each member shares the same amount of responsibility for how the LLC’s operations are run daily. Due to the equality of its members, a member managed LLC does not have a board of directors included with the entity. (As having a board of directors would disrupt the entity’s natural equality balance.)
How To Incorporate As A Member Managed LLC
The ideal business to form a member managed LLC is one where the members (owners) all want to be equally involved with running the company. It’s also a suitable fit for small businesses with limited resources where all members must have their hands on deck.
Before filing to form a member managed LLC, make sure you specify that the business will be member managed on your application forms. Then, you may submit the organizational form and pay the fee. As with a single member LLC, it’s also important that you keep and maintain up-to-date operating agreements. The duties of the members in a member managed LLC may be equal, but they must be documented for the sake of both clarification and posterity in the business.
Manager Managed LLC
We’ve reviewed what to do as a solo member of a single member LLC and as a member that shares equal duties in a member managed LLC. Manager managed LLCs, however, tend to be the most complicated of the three entities.
Manager managed LLCs, unlike their two counterparts, come with a board of managers. This is similar to a board of directors. The board of managers has more control over the business than the members do and take more responsibility for its operations.
How To Incorporate As A Manager Managed LLC
A manager managed LLC is certainly the most structured of the three management structures. However, this can also serve to the members’ benefit in the long run.
If an LLC has too many members and struggles to delegate duties to each one, then it would be extremely helpful to have a board of managers in place for organizational purposes. Conversely, some members of an LLC may not want the responsibility of running the business — and the board in managers is there to step in as needed. A board of managers doesn’t have to be entirely composed of the LLC’s members either. Manager managed LLCs may hire non-members to sit on the board as well.
Much like filing to form a member managed LLC, manager managed LLCs must indicate that their company is manager managed on their paperwork. Once they have made that readily clear, they may submit their formation paperwork in and pay the filing fee.
Which LLC Structure Should I Choose?
Every small business is different, so I cannot advise with certainty whether one of these three management structures — single member LLC, member managed LLC, and manager managed LLC — is the best fit for your company. If you are unsure of which to incorporate as, consult with an attorney or legal professional. Ask them any questions about the process you may have and work together to determine the proper LLC structure for you and your business.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.